Team 2 Interim Report: Emerging Sectors of the Sea 7-9th May 2014

Emerging Sectors of the Sea.

With an underlying theme of Emerging Sectors of the Sea, this segment of the study mission
examines the various industries within the broader maritime sector; with a focus on the Danish
Offshore Cluster in the Port of Esbjerg. The first half of the program is conducted within a classroom
setting with Professor Henrik SornnFriese and his former PhD student Thomas Roslyng Olesen. We
studied the historical development of the maritime sector in general, followed by a case study of
how dislocation of shipbuilding activities from Denmark to Asia impacted Danish Shipbuilders and
its supporting industries. The latter half of the segment provides more industry exposure and
experiential learning opportunities as we visited various Danish organizations including Port of
Esbjerg, companies offering offshore services and a maritime academy based in Svendborg.

Industry Emergence: Concepts and Perspectives
Professor Henrik SornnFriese, who heads the underlying theme, introduced the theme with a
lecture against the historical backdrop of how ship owners came to be. While the earliest form of
shipping could be traced back to Egyptian coastal trade in 3000 BC, shipping only became a global
business in the Age of Discovery around 15-17
th
century. Back then, the new trading world
stretched from North and South America in the West all the way to China and India in the Far East.
Using ships, merchant traders could fetch handsome rewards by trading various cargoes between
the continents. However, with subsequent proliferation and sophistication of seaborne trade over
the next couple of centuries, the business of owning and operating ships grew to become a
distinctly separate line of business from trading. The need for ship owners became apparent. At the
same time, other supporting industries such as ship finance, ship brokerage, wrecking (marine
salvage) etc. also emerged to support the expanding shipping industry. Amongst which, the most
notable development would be the evolution of Edward Lloyds coffee house to the insurance
market and classification society known today as the Lloyd's of London and the Lloyd's Register.

With that in mind, we could better appreciate the shipping industry as part of the much broader
maritime sector which encompasses shipping as well as supporting industries which can operate
onshore or at sea. Specifically, we ought to include suppliers for machinery and supplies, service
providers, infrastructures, regulators as well as the surrounding institutional set-up e.g. trade
associations, marine academy etc.












Team 2 Interim Report: Emerging Sectors of the Sea 7-9th May 2014


In the past century, many new additions to the broader maritime sector emerged on a similar basis
of how ship owners came to be and also based on geographical endowments. For instance, various
offshore industries (e.g. Offshore Oil & Gas, Offshore Wind & Deep Sea Mining) have emerged in
Esbjerg, Denmark. These industries rode on the exploration and production projects in the North
Sea where firms combat rough waters and weather conditions to extract crude oil. This initial
development core competency and expertise to operate under harsh conditions provided a base for
newer industries which are currently in the high growth phase of the industry life cycle e.g. offshore
wind industry and deep sea mining. The emergence of Ship Management firms, on the other hand, is
really a case of increasing labor division and skills specialization. Much like how ship owners were
uncoupled from trading, this traditional in-house function has developed into professional
independent companies which provide the service of managing the daily operations of ships.
Furthermore, with a lesser need to monitor the daily vessel operations, the ship owners function
then focuses on strategic ship investments or divestments in this highly cyclical industry. Unlike the
its predecessor, the modern day ship owner have the flexibility of placing his vessel on shipping
pools, leasing his vessel out, contract ship management firms etc. Professor Henrik also highlighted
other emerging trends such as Green shipping and growth potential in Arctic Shipping.

Creative destruction in the Danish Maritime Industry: From Shipyards to Maritime
Technology
Over the past three decades, we have seen a dislocation of shipbuilding activities from Europe to
three main Asian nations, namely Japan, Korea, and China. CBS research fellow Thomas Roslyng
Olesen presented his paper on how Danish shipbuilders and affiliates were impacted by the shift
and hope that this study would offer some insights to these Asian nations should the industry once
again decide to shift operations to another part of the world.
This transition period took place from 1977 to 1985 where the European market share of global
shipbuilding fell from 41% to 18% while Asia increased its market share from 46% to 70%. This
shift was in fact part of a larger movement where European manufacturing sector in general
declined. Owned by the J Lauritzen Group, Danyard Frederikshavn was one of then one of the major
ship yards in Denmark who had to go through this tough period of change. Initially, the Danish
yards tried to adopt a blue ocean strategy in attempt to differentiate itself from the highly cost
competitive Asian yards. By going after niche projects such as advanced chemical tankers, they
managed to win large ticket projects from the growing American shipping industry. While well
intended, the lack of experience with sophisticated tankers and inability to appoint experienced
sub-contractors resulted in heavy losses. In the case of Danyard, it suffered a deficit of 490 million
DKK for failing to deliver contracted tonnages. This incident was a major contributor to the firms
shut down in late 1990s.
With major yards such as Danyard, Elsinore, Nakskov and B&W winding down their operations,
thousands of skilled employees who worked at these yards became jobless. In response, a
Foundation for Maritime Development and Cooperation (Fonden Maritim Udvikling og Samarbejde)
was created jointly by the county, municipality and local business council to create jobs for this
skilled labor force. Eventually, this pool of skilled labor was absorbed into over 26 large corporate
Team 2 Interim Report: Emerging Sectors of the Sea 7-9th May 2014

spin offs, out of which, some continue to exist today in one form or another (approximately 10)
while some spin offs were less successful.
Thomas concluded that the success of these spin offs stemmed from various conditions which
includes the availability of investors, availability of entrepreneur, transferaability of skill sets etc.
This economic transition which was forced upon the Danish yards forced business leaders to
rethink their business strategy, rethink their business models as well as leverage on existing
competency to stay relevant to the changing needs of the global economy. The emergence of low
cost Asian yards had prompted the need for dislocated Danish yards to move towards more
knowledge intensive activities which can offer high value add and hence justify the high cost of
labor. This conjecture is perhaps supported by the fact that the closure of yards had not impacted
R&D jobs as much as labor intensive jobs.

Offshore Cluster: Port of Esbjerg, SEMCO and Blue Water Shipping
The port of Esbjerg is the biggest port in Denmark with
150 years of history. The town of Esbjerg grew from an
initial population of 15 families to the current 100,000
people with the development of the port. It started out
serving the dairy exports industry to the UK before
developing as a fishing port. As the oil and gas industry
took off in Denmark, it serves as a hub where the
products pass through.

In recent years, the port has started expanding the port
facilities towards the east, with an expected investment
of 105 million. The new east port will emphasize on
developing Esbjerg as major exporting port for wind
turbines and offshore facilities. Currently, the port has
Team 2 Interim Report: Emerging Sectors of the Sea 7-9th May 2014

a substantial market share of 65% of the total Danish wind turbine export and 80% of offshore
facilities. Increasingly with the offshore drilling conducted further off in the North Sea, there are
concerns regarding the competitiveness of utilizing Esbjerg as the port for exporting the offshore
facilities. Nevertheless, the port management has been consistently improving the port conditions
by dredging the channel and maintaining a substantial draft of 10.3m.

Svendborg International Maritime Academy (SIMAC)
SIMAC has a history of 150 years in maritime training in the town of Svendborg. Its current location
was built in 1952 after they vacated the previous premise. It has a total of 3 different locations, each
catering to a different aspect of their training. The aim moving forward is to integrate the three
different locations into a single site, to improve the convenience to the students. Being an
independent institution with over 600 students, SIMAC offers three main programs - Ship Officer,
Marine Engineer and Master Mariner. Although SIMAC offers dual certification for ship officers with
the intention of differentiating Danish seafarers, the results were less successful as it was difficult
to utilize both skills onboard traditional ships. The 4 year course and industrial attachment
prepares the students for a career onboard, with the minority of the cohort becoming ship captains
after 10-12 years. Although most seafarers start off their careers with foreign shipping companies,
they do eventually return to Denmark for a shore-based career, and contributing back to the
country with their global mindset and experiences.

The competitiveness of the Danish shipping industry can be summarized in the following factors:
Taxes: Special tax exemptions applicable to Danish seafarers made it a lucrative career option for
most students, given the high income tax rates in Denmark. From the perspective of the ship
owners, the implementation of the tonnage tax further incentivizes them to fly their ships in
Denmark.
Technology: High technological advancement and the continuous emphasis on green-shipping
differentiates Danish shipping beyond just cost considerations
Talent: SIMAC plays a significant role in ensuring a constant provision of highly qualified officers
for the shipping industry. It has increasingly become more challenging for SIMAC to continuously
attracting new talents into this industry. Currently, female makes up ten percent of the total cohort
and efforts have been made to continuously attract females into the industry.
SIMAC possesses a simulator at the Western location which offers the students an unparalleled
experience in learning navigation first hand, short of actually going on board a ship. At the location
was also a lab containing an actual diesel engine. This was an initiative by the students who wanted
hands on training. They were able to source the engine after obtaining funding from the municipal
Government and this engine has benefitted not only the students, but also companies who were
able to run tests on the engine, with the results being similarly viable as those taken on board a real
ship. The students were also required to have technical skills which include welding and basic
maintenance. On site were facilities which catered to such trainings and it was mentioned that it is
preferred for the students to possess such competencies which will make them better supervisors.
Employees of the students have highlighted the need for them to have practical knowledge with
Team 2 Interim Report: Emerging Sectors of the Sea 7-9th May 2014

regards to the repairs of the engines, which resulted in the swift acquisition of engines which
students can practice on.